Shaving real estate commissions can save sellers thousands

Los Angeles Times article, "Shaving real estate commissions can save sellers thousands" (December 6th, 2009), offers an unnecessarily complicated, misguided, and misleading analysis of a simple problem--what commission to pay your real estate agent.  First, the author suggests that in such a poor housing market, real estate agents desperate for work will accept lower commissions, saving sellers money.  Of course, real-estate agents' effort (the amount of work they puts into getting a sale) is an increasing function of how much money they can make from a deal, so they will exert less effort for lower commission.  For example, if it costs them $10,000 to put in the effort necessary to sell a house for $200,000, they will put in the effort to sell the house at that price for a 5% commission, but not for a lower commission.  Thus, even if a buyer can negotiate for a 1% lower commission, he may end up losing more than 1% of his potential gain from a house sale.

Like in any economic problem, the seller should simply maximize his earnings as a function of the sellers' commission, and the market likely has set this rate for the seller already.  If there were more money to be made for both parties through either a higher or lower commission rate, why would such a commission rate not emerge in the market?  Without clarifying why one would expect this to be true, the author offers an extreme example where one woman saved money by paying the market price, rather than a steeply discounted commission offer.

In addition, the author falsely implies that simply cleaning up a home will increase a real-estate agents' efforts.  Certainly, no one in the business of real estate would survive if they were mislead about the quality of a home due to a few dirty dishes!

A seller who invites a professional into his unkempt house -- dirty dishes everywhere, general clutter or filth -- may convey a message that the house will be difficult to sell. The longer a place takes to sell, the more an agent's cost per hour goes up -- and the likelihood of the agent offering a discount diminishes. Sellers in today's difficult market demand sophisticated marketing strategies, all of which are financed by the agent's commission.

Jones said she sometimes can tell immediately whether a home is likely to sell quickly or languish. Sellers who fix their places up to make a good first impression on agents are more likely to get a double payoff: top dollar on their property, plus a discount on the commission they pay.

More likely, dirty dishes signal that the seller is uninterested in presenting himself well to the real estate agent and similarly is uninterested in negotiations.  If sellers' market experience suggests that clean homes signal nit-picky, tough negotiating sellers, then they will offer the discount they know is coming.